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NEW$ & VIEW$ (17 JANUARY 2013)

U.S. home building rose 12.1% in December to an annual rate of 954,000, the highest level since July 2008.

Compared with a year ago, new-home construction was up 36.9%. For all of 2012, 780,000 new homes were started, the most since 2008.

Nevertheless, housing starts are still below historical levels. Builders have started construction on an average of 1.5 million new homes a year since 1959.

Construction of single-family homes, which made up two-thirds of housing starts last month, rose 8.1% in December to a rate of 616,000 units. Single-family construction was up 18.5% from a year earlier.

Starts in November were revised down to a rate of 851,000, reflecting a 4.3% decrease from the previous month. (…)

Thursday’s Commerce Department report showed that the number of new building permits, an indication of future construction, rose 0.3% to an annualized level of 903,000 in December. (…)

(…) In a normal market, more supply would help keep prices in check, but the opposite trend is currently underway: New home prices are rising. An﻿d this time, experts say, it’s not just buyer demand or fancy finishes on new homes that are driving prices up—it’s the result of a bidding war among builders. “In the last 12 months, [it’s] been ramping up,” says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.

Much of the competition is over land, say housing experts, as the amount of desirable, developed land available for companies to purchase and begin building has been decreasing. Supply was just shy of 17 months for land defined as “Class A” – near jobs, top school districts and shopping – during the third quarter of 2012, down from 19 months the previous quarter, according to Metrostudy, a real-estate research firm; in normal market conditions, supply is 24 to 36 months. Separately, in a fall survey by the National Association of Home Builders, over 40% of builders said supply of land was low in their markets.

With less to choose from, builders are paying more for the land they purchase. Just over one-third of builders in NAHB’s survey said they were paying a “somewhat” or “substantially” higher price for developed land compared to a year prior. The figures vary by market, but in Phoenix, for instance, it costs roughly $1,700 per “front foot” (that’s based on a measurement of the width of the lot when viewed from the street) on average, up 31% from a year prior, according to Metrostudy. In Houston, it’s an average $1,200 per front foot—near peak levels last seen during the housing boom.

The new orders index fell to -4.3 from 4.9 in December, first reported as 10.7, and the shipments index plunged to 0.4 from 14.7, originally put at 18.3.

Labor conditions contracted sharply. The important hiring index worsened to -5.2 in January from -0.2, first reported as 3.6 in December. The workweek index dropped to -8.3 from 0.4, first reported as 4.2. (Chart from Bespoke)

Five years ago, German residential property was a graveyard for many foreign investors. Now, they are back throwing wads of cash at the listed sector, where share prices rose an average of 50% in 2012.

Deutsche Wohnen, DWN.XE -2.44% which owns more than 73,000 apartments in major cities, raised €195 million in fresh equity Wednesday in a deal that was multiple times oversubscribed. It now trades at a 17% premium to its last reported net asset value, whilst GSW Immobilien, GIB.XE +1.26%which owns 53,000 apartments in Berlin, is at an 8% premium. Is this the start of a bubble?

German residential real estate’s appeal is becoming clearer. An aging population and young migrant workers are flocking to big cities, where there is a shortage of apartments. In Berlin, there are three times as many households being created than new apartments being built, estimates Morgan Stanley. That imbalance should persist given the high cost of building relative to buying. Rents would need to double for construction to pick up, estimates GSW. Indeed, apartment prices could rise by 10% in Berlin, Augsburg, Hamburg, Munich and Nuremberg in the 12 months to the end of September, the German Institute of Economic Research forecasts.

But listed property companies, which own large stocks of former social housing, will need to rely more on rental growth to support higher capital values. Roughly 2% to 3% rent increases expected for Deutsche Wohnen and GSW’s portfolios look achievable, given wage settlements are expected to rise. Meanwhile, with borrowing costs so low, acquisitions should continue to boost their earnings provided prices of big apartment portfolios remain stable. Deutsche Wohnen recently bought 5,200 apartments in Berlin on a 7.7% gross yield, which is more than double its cost of debt.

There are clearly risks. One widely held assumption is that after more than a decade of stagnation, German residential property can’t fall in value. However, if capital growth is lower than expected, any premium to net asset value could quickly evaporate. Meanwhile, yield-hungry investors could continue to be swayed by forward earnings yields over 5% at Deutsche Wohnen and GSW, based on Morgan Stanley estimates. With German government bonds offering just 1.5%, buying listed property still seems a risk worth taking.

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